LIU QIAN v. SUNWAY INTERNATIONAL HOLDINGS LTD

HCA 318/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 318 OF 2016

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JUDGMENT

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A. Application

1.  This is the plaintiff’s application for summary judgment[1] against the defendant (“Sunway”) for the sum of HK$47,333,332.86 or HK$19,999,999.80 or such sum as the court may assess; alternatively, for an order that Sunway shall convert the plaintiff’s convertible notes (referred to and defined hereinafter) into the shares of Sunway to be allotted to the plaintiff by way of specific performance, and damages in lieu of or in addition to specific performance to be assessed.

B. Preliminary matters

2.  Before dealing with the plaintiff’s application for judgment under Order 14, I shall first dispose of the parties’ non–Order 14 applications which are as follows:

(a) the plaintiff’s Summons dated 10 February 2017 to amend the Statement of Claim;

(b) the plaintiff’s Summons dated 10 February 2017 to amend the Order 14 Summons; and

(c)   Sunway’s Summons dated 21 February 2017 to file the 2^nd Affirmation of Leung Chi Fai, annexing thereto Sunway’s Amended Statement of Claim in HCA 1391/2015 and a document entitled Transfer Instructions of the convertible notes dated 5 September 2014 (“Transfer Instructions”).

3.  Ms Lok on behalf of Sunway raised no objection to the plaintiff’s amendment summonses.  I therefore grant an order in terms of the plaintiff’s two summonses.  But Ms Lok submitted that to enable the court to fairly adjudicate upon this Order 14 application, Sunway’s summons seeking leave to introduce new evidence should also be allowed. 

4.  On behalf of the plaintiff, Mr Chain opposed Sunway’s new evidence summons, emphasising the prejudice visited upon the plaintiff as a result of this late introduction.

5.  When asked whether he would need an adjournment to deal with Sunway’s evidence which came in late, Mr Chain was firm that his client did not want an adjournment, which he called the greater prejudice, and would rather accept the lesser prejudice of having to deal with the new evidence at this hearing.

6.  In the circumstances, considering the draconian effect of an Order 14 application, and the fact that Mr Chain did not after all seek an adjournment and confirmed his readiness to proceed with his application, I exercise my discretion to grant an order in terms of Sunway’s Summons dated 21 February 2017.

C. The plaintiff’s case

C1. The plaintiff’s factual case

7.  She said she was an investor residing in the PRC. 

8.  Sunway was and is a Bermuda limited company listed in the Hong Kong Stock Exchange.

9.  On 22 April 2014, Sunway issued convertible notes in the principal amount of HK$300,000,000 due on 28 April 2017 (“the Notes”).  There were 30 convertible bonds (with certificate numbers from 001 to 030) of HK$10 million each.  They were all subject to the terms of the instrument as set out in the Terms and Conditions of the convertible notes. 

10.  By a written Agreement of Transfer of the Notes dated 19 May 2014 (“the Transfer Agreement”) entered into between Xiao Guang (“Xiao) as the vendor, the plaintiff as the purchaser and Wang Zhining (“Wang”) as the repurchaser, Xiao agreed to sell and the plaintiff agreed to purchase HK$15 million worth of the principal amount of the Notes for a consideration of HK$12.75 million. 

11.  The plaintiff said she duly paid the consideration by cheque and produced the bank statement evidencing the said payment.

12.  It is the plaintiff’s case that since the Notes were issued in HK$10 million each, but the plaintiff purchased only HK$15 million’s worth of the Notes, two Notes were transferred to the plaintiff and registered under her name, whilst the plaintiff would hold HK$5 million of the Notes on behalf of Xiao.

13.  Since around 19 May 2014, the plaintiff has become the duly registered holder of two convertible notes of Sunway in the total principal amount of HK$20,000,000 (“the Convertible Notes”).  Two new certificates numbered 031 and 032 were issued by Sunway to the plaintiff to replace the old notes which were in Xiao’s name. 

14.  The relevant transfer was entered into the register of Sunway on about 19 May 2014.

15.  In May 2015, the plaintiff made two attempts on 26^th and 27^th to enforce the conversion rights by asking to meet Mr Leung of Sunway at the latter’s office.  Both attempts failed. Furthermore, the plaintiff was told that her rights under the Convertible Notes could not be enforced and would not be recognised by Sunway because of a dispute between Sunway on the one part and Xiao and Wang on the other.

16.  The plaintiff continued to demand Sunway to recognise her conversion rights and made written demand letters through a PRC firm in June 2015 and later through a firm in Hong Kong in November 2015, but without success.

17.  On 3 February 2016, the plaintiff issued the Statement of Claim.

18.  On 13 April 2016, Sunway filed its Defence, the Reply was filed on 3 June 2016.

19.  In October 2016, the plaintiff issued her Order 14 application.  As seen above, this was amended with leave of this court. 

C2. The plaintiff’s case for Order 14

20.  Thus, the plaintiff’s case for Order 14 is very simple.  She relies on the express terms of the contract which are contained in the Terms and Conditions and the Instrument relating to the Convertible Notes (“the Instrument”), the most important parts of which that give her the right to enforce the contract are as follows:

(a) Clause 1 of the Instrument defines “Noteholders” as the person for the time being entered in the register as the holder of the Convertible Notes. 

(b) Condition 2 of the Terms and Conditions state that the Convertible Notes are transferrable.

(c) Condition 2.2 of the Terms and Conditions provide that “Title to the Notes passes … upon the entry on the Register of the relevant transfer”, and that “the Noteholder shall … be treated as the absolute owner of the relevant Notes for all purposes”.

(d) Condition 1.4 of the Terms and Conditions provides that Sunway “covenants to and with the Noteholders that it will comply with and perform and observe all the provisions of this Instrument and the Terms and Conditions which are expressed to be binding on it.  The Terms and Conditions shall be binding on [Sunway] and the Noteholders.”

(e) Condition 5.1 of the Terms and Conditions provides that the Noteholder “shall have the right … to convert the whole or any part of the outstanding principal amount of the Notes into [Sunway’s] shares at any time following the date of issue until 4:00 pm on the Maturity Date” (ie, 28 April 2017).

21.  The plaintiff said the combined effect of the above clauses is that she becomes the registered holder of the Convertible Notes on the Register of Sunway which was entered into by Sunway itself.  This was confirmed and reinforced by the fact that new notes were issued to her to replace the old notes in the name of Xiao, again an act completed by Sunway itself.  It is the express provision of the contract that she is the absolute owner of the Convertible Notes for all purposes.  Sunway is obliged by the contractual terms to allow the plaintiff, as the registered Noteholder, to exercise her conversion rights upon her demand in May 2015 and to perform in accordance with Condition 5.1 of the Terms and Conditions. 

22.  The refusal or continued refusal by Sunway to honour its contractual obligations constitutes a continuing breach of contract, which gives the plaintiff’s the right to accept the breach and seek damages for breach of contract or equitable remedies in lieu of specific performance.

23.  She relies heavily on Johnson Electric International Ltd v Bel Global Resources Holdings Ltd (unreported, HCA 1240/2012, 17 April 2013) (“Johnson Electric 2013”); and Johnson Electric International Ltd v Bel Global Resources Holdings Ltd (unreported, HCA 1240/2012, 18 March 2014) (“Johnson Electric 2014”).

24.  In Johnson Electric 2013, the plaintiff was seeking to enforce debt instruments which it had purchased according to clear contractual terms.  The defendant alleged common mistake and fraudulent misrepresentation on the related transaction under which the debt instruments were issued and argued that the debt instruments were void.  At first instance, summary judgment was entered against the defendant.  The appeal was only allowed after Ladd v Marshall-compliant fresh evidence was admitted which established a triable issue of whether or not the plaintiff was a bona fide purchaser for value without notice. 

D. Sunway’s case

25.  Sunway’s case is far more complicated.

26.  Sunway referred to a Share Sale Agreement dated 3 October 2013 (amended on 30 January 2014) under which Sunway’s wholly owned subsidiary First Billion Global Limited (“First Billion”) as the buyer, Sunway as the issuer, entered into agreement with Xiao and Wang.

27.  Xiao was alleged to be the sole legal and beneficial owner of the entire issued shareholding (being 1 issued share of US$1 (“the Share”)) in Joint Expert Global Limited (“Joint Expert”).  Joint Expert owned 100% of a Hong Kong company called Royal Asia International Limited (“Royal Asia”) which in turn owned 95% of a PRC company, Zhuhai Hoston Special Materials Co Ltd (“Zhuhai Hoston”).  Zhuhai Hoston owned 70% of a PRC company called Guandong Hengjia which manufactured and sold construction materials.

28.  Xiao also purported to be the beneficial owner of a shareholder’s loan owed by Royal Asia to himself (“the Shareholder’s Loan”).

29.  By the Share Sale Agreement, Xiao agreed to sell the share and Shareholder’s Loan to First Billion.  Wang agreed to make the representations, warranties and guarantees under the Share Sale Agreement as a precondition to First Billion’s entering into the same.

30.  The consideration to be paid by First Billion for this transaction was HK$550 million in the following manner:

(a) Banker’s cashier order of HK$150 million in favour of Xiao;

(b) Promissory note of HK$100 million in favour of Xiao; and

(c) First Billion to procure Sunway to issue convertible notes of a principal amount of HK$300 million in registered form and convertible into ordinary shares in the capital of Sunway in favour of Xiao.

31.  The Share Sale Agreement was completed on 2 May 2014.  As part of the consideration, Sunway issued 30 Convertible Notes each with a face value of HK$10 million, in favour of Xiao.

32.  011 – 012 were assigned by Xiao to the plaintiff under the Transfer Agreement in manner provided in para 10 above.  New certificates numbered 031 – 032 were issued by Sunway, registering the plaintiff as the owner in place of Xiao under 011 – 012. 

33.  The third Convertible Note was pledged to the plaintiff. Notably, Sunway observed that instead of the plaintiff paying the HK$12.75 million to Xiao, it was recorded in the Transfer Agreement that the money was actually paid to the repurchaser, Wang. 

34.  Then, according to Sunway, Xiao and Wang were found to have committed various fraudulent misrepresentations and material breaches of the Share Sale Agreement vis-à-vis Sunway and First Billion, details of which do not require to be set out here. 

35.  This caused First Billion and Sunway to claim rescission of the Share Sale Agreement by issuing the Indorsement of Claim under HCA 1391/2015, claiming, inter alia, a declaration that the 30 convertible notes, save already redeemed or converted, are null and void. This of course includes the three convertible notes held by the plaintiff, two of which, namely, bearing certificate numbers 031 – 032, are the subject matter of her Order 14 application in the present case. 

36.  It is Sunway’s case that the plaintiff was a nominee of Wang, had knowledge of the plaintiff’s claims and rights to rescind and provided no consideration for the convertible notes.

37.  Sunway and First Billion sought to join the plaintiff as the 3^rd defendant in HCA 1391/2015.  I was told that the leave application will be heard in March 2017.  For the purpose of this present application of the plaintiff, Sunway’s Amended Statement of Claim forms part of the evidence in the 2^nd Affirmation Leung Chi Fai pursuant to leave being granted herein. 

38.  The legal basis of her joinder is that she is a purported assignee/ pledgee of three of the Convertible Notes (two of which concerns the Order 14 application), being part of the consideration paid under the Share Sale Agreement which Sunway and First Billion seek to rescind.

E. Discussion

39.  It is Ms Lok’s submission that Sunway has raised an arguable defence that the Convertible Notes are clearly invalid or void.

40.  It is Sunway’s case that first, the plaintiff was not a bona fide purchaser for value without notice.  Secondly, even if she were a bona fide purchaser for value without notice, it is well established that she takes subject to equities: Guest on the Law of Assignment, 2^nd Ed, para 7-01.

41.  As pleaded in the Amended Statement of Claim, the Share Sale Agreement is liable to be rescinded, Xiao is obliged to return the entire consideration including the plaintiff’s two Convertible Notes to Sunway.  The plaintiff, who derives title from Xiao, takes the choses in action (ie, the Convertible Notes) subject to all equities including the debtor’s (ie, Sunway) right to rescind.  Hence, Sunway can put up the same defence vis-à-vis the plaintiff as assignee of Xiao.

42.  In response, Mr Chain advanced four main arguments which he called the four Fatal Flaws of Sunway’s case.

E1.   The 1^st Fatal Flaw of Sunway’s case

43.  The 1^st Fatal Flaw can be disposed of quickly.  Under the original defence, Sunway sought to establish that the plaintiff’s rights under the Convertible Notes are invalid or void due to a breach of the fundamental terms of the Share Sale Agreement. 

44.  Mr Chain submitted that breach of an agreement would not supply the basis for rescission.  A breach of contract allows the party to the contract to terminate the contract and sue for damages, but not the right to rescind the contract.

45.  However, with the admission of the new evidence, the Amended Statement of Claim of Sunway (and First Billion) has pleaded a clear case of rescission of the Share Sale Agreement against Xiao and Wang based on misrepresentation.  It is trite that a contract will be treated as never having come into existence if it is rescinded: Johnson v Agnew [1980] AC 367 at 392H – 393B.  Once rescinded, the Convertible Notes (which formed part of the consideration under the Share Sale Agreement) will be rendered null and void.

46.  So the 1^st Fatal Flaw is no longer available to Mr Chain, and he has to resort to the 2^nd, 3^rd and 4^th Fatal Flaws of Sunway’s case, all or either of which, says Mr Chain, would operate to prevent Sunway from exercising its equitable right of rescission.

E2. The 4^th and 3^rd Fatal Flaws of Sunway’s case

47.  The 4^th Flaw can also be dealt with swiftly in light of the new evidence.

48.  It is the plaintiff’s case that she was a bona fide purchaser for value without notice and thus she takes free of Sunway’s equitable right to rescind.

49.  In Johnson Electric 2013, at para 17, it is said,

“ 17. … It is well settled law that the effect of a fraudulent misrepresentation only renders a contract voidable but not void. The victim of a fraudulent misrepresentation is entitled to, at his election, rescind the contract ab initio. But, unless and until he does so, the contract continues to be binding and enforceable: …. The right of the innocent party to avoid this voidable transaction is lost if the interest in the subject matter of the transaction has been acquired by a bona fide purchase for value without notice of the underlying fraud: Cartwright: Misrepresentation, Mistake and Non-Disclosure, 3^rd edn, 2012; Cundy v Lindsay (1878) LR 3 App Cas 459; White v Garden; The Attorney General v Leung Kam Wah [1968] HKLR 366.”

50.  It is not disputed that in Johnson Electric 2013 itself, the appeal was allowed on the basis of fresh evidence showing the plaintiff might not be a bona fide purchaser for value without notice.  Unconditional leave to defend was given.

51.  In the present case, amongst the new evidence annexed to the 2^nd Affirmation of Leung Chi Fai was the Transfer Instructions from Wang to Xiao dated 5 September 2014 which provides, amongst others, that:

「 《可換股債券轉讓指示》

……

蕭光先生代我持有三億港元新威國際控股有限公司2014 年發行的可換股票據，該可換股票據每張面額為1000 萬元港幣，可按每股0.30元港幣價格轉換為新威國際普通股……根據我的指示，蕭光先生已在如下的時間將部分的債券轉讓給了下列人士：

1. 2014年5月19日將貳仟萬港元的債券轉讓給劉倩女士。同時將壹仟萬港元的債券抵押給劉倩……

以上所有的轉讓，在轉讓合同中的價格僅是作為申報用途，並沒有發生實際的資金支付，蕭光先生沒有收取任何現金或實質利益。

……」 (Emphases added)

52.  Mr Chain argues that this was a document between Xiao and Wang.  The plaintiff was not privy to this document. Furthermore, it ought to be considered in conjunction with the plaintiff’s strong documentary evidence of payment, namely, bank statement of a bank account.

53.  But this is an Order 14 application.  The defendant does not have to establish its case on balance of probabilities as in a trial.  All that is necessary is to show a believable defence.  The Transfer Instructions has undoubtedly raised a believable defence that the plaintiff might not have paid consideration.  If consideration did not even pass, she was obviously not a bona fide purchaser for value without notice.  

54.  On the basis of Johnson Electric 2013 and Johnson Electric International Ltd v Bel Global Resources Holdings Ltd [2014] 5 HKC 504 (CACV 36/2013, 8 May 2014) (“Johnson Electric Court of Appeal”), Ms Lok was right that Sunway should be entitled to unconditional leave to defend, on the ground that the plaintiff might not be a bona fide purchaser for value without notice. 

55.  So, the plaintiff’s argument based on the 4^th Flaw fails.

56.  Mr Chain submits in support of his 3^rd Fatal Flaw argument that Sunway was estopped from rescinding the contract by the act of registering the plaintiff as the Noteholder, coupled with the express wordings of the Terms and Conditions. 

57.  In similar vein, Mr Chain’s argument that Sunway was somehow estopped from exercising its right to rescind the Convertible Notes against the plaintiff, is a reliance on equitable principles. Whether the plaintiff is a bona fide purchaser or assignee for value without consideration would have an impact on the plaintiff’s reliance on this equitable doctrine.  Thus, even if the plaintiff’s legal proposition on estoppel is correct, which is unclear, this issue ought to be dealt with at trial.

58.  On this ground alone, Sunway raised a believable defence.

E3.   The 2^nd Fatal Flaw of Sunway’s case

59.  Faced with the new evidence which has more or less put to rest his arguments (at this Order 14 stage where the defendant is required to show no more than a believable defence) as regards the 1^st, 3^rd and 4^th Fatal Flaws, Mr Chain quite rightly had to rely heavily on the 2^nd Flaw.

60.  This flaw concerns the exclusionary effect by express terms of the contract on all equities such that the assignee of the chose in action takes free of all equities (including the right to rescind) from the assignor. 

61.  Mr Chain relies on the following strong-worded contractual clauses:

(a) Condition 1.3 of the Terms and Conditions whereby Sunway covenants to the Noteholder (Liu) that the company “will comply with and perform and observe all the provisions of this Instrument and the Terms and Conditions”.

(b) Condition 2.2 of the Terms and Conditions which provides that “the Noteholder shall be treated … as absolute owner of the relevant Notes for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any interest in it or any writing on, or the theft or loss of, the certificate issued in respect of it)”.

(c) Condition 2 of the Terms and Conditions relates to the requirements for effecting a transfer, and provides that “Title to the Notes passes only upon the entry of the Register of the relevant transfer” which register is kept and controlled by company itself.

(d) Finally, Article 120 of Sunway’s own bye-law stipulates that “Debentures, debenture stock, bonds and other securities … may be made assignable free from any equities between the Company and the person to whom the same may be issued.”

62.  It is submitted that the aforesaid clauses, taken together, would effect a transfer of the chose in action to the plaintiff which is free from all equities including Sunway’s right to rescind the Convertible Notes, even though the plaintiff might not be a bona fide purchaser for value without notice.

63.  Pausing here, it should be noted that there is actually no dispute between Mr Chain and Ms Lok that if the plaintiff was a bona fide purchaser for value without notice, it is well established that she takes subject to equities.  The only issues on which they dispute are (a) whether this “subject to equities” principle can be excluded by contract; and (b) that the exclusionary effect applies even though the assignee was not a bona fide purchaser for value without notice, as is the situation of the plaintiff in the present case.

64.  In support of his argument, Mr Chain relies on Johnson Electric 2014, where it is said:

“ 28. ... It is settled law that an assignee of a chose in action cannot acquire a better right than what the assignor had, and takes the chose in action subject to all the equities affecting it in the hands of the assignor which are in existence before notice is received by the debtor: see Snell’s Equity[(32^nd ed) at 3-024]. One of such equities is the debtor’s right to rescission. As the contract under which the subject bond was issued was voidable, the Defendant may set up that claim by way of defence against the Plaintiff as assignee, even though it has given value for the assignment.

29. In reply, Mr Burns argues that the ‘subject to equities’ rule may be modified or excluded by the terms of the contract between the debtor and the assignor: see Re Agra and Masterman’s Bank[(1867) LR 2 Ch App 391]; Re Blakely Ordnance Company[(1867–68) LR 3 Ch App 154 at 159–160]; Re Goy & Co Ltd[[1900] 2 Ch 149 at 154] and Hilger Analytical Ltd v Rank Precision Industries Ltd[[1984] BCLC 301at304–305]. He argues that the rule was clearly excluded by the terms and conditions of the bond and in the certificate of the subject bond.

30. Clauses 2.1 and 2.4 of the terms and conditions expressly provided that the bond constitutes a ‘direct’ and ‘unconditional’ obligation of the Defendant and that the holder of the subject bond will be treated as ‘its absolute owner for all purposes’. The certificate of the subject bond which states that the Defendant ‘promise[s] to pay the person who appears at the relevant time on the Register of Bondholder as holder of the Bonds in respect of which this Certificate is issued’ further reinforces the Defendant’s obligation as absolute, unconditional and not subject to any equities.

31. Clause 3.1 of the terms and conditions of the bond which provides for the rights of a transferor or assignor of the bond sets out comprehensive requirements for effecting such transfer. On the strength of that clause, it is beyond sensible argument that it was envisaged that the original holder of the subject bond would be entitled to transfer the bond to a third party free of any equities. This conclusion is further supported by paragraph 111 of the Defendant’s Bye-laws, adopted by a written resolution of its members on 17 August 2006, which provided that ‘debentures, bonds and other securities may be made assignable free from any equities between the company and the person to whom the same may be issued’.

…

34. I agree with Mr Burns’ submission.  This ground is unarguable.”

65.  Johnson Electric 2014 was the decision on stay of execution.  Its first instance decision Johnson Electric 2013 on summary judgment did go on appeal.  But the appeal by the defendant was allowed on the ground that the new evidence of the defendant raised a sufficiently credible foundation on which the inference of knowledge of the fraud on the part of the plaintiff might be drawn at trial: paras 5 and 6, Johnson Electric Court of Appeal.  The Court of Appeal did not decide whether the defendant had raised a believable defence on the exclusionary effect of the bond in question: see para 6 of the Johnson Electric Court of Appeal, supra, and thus this Court of Appeal decision does not help the determination of the validity of the 2^nd Flaw.  I derive help from Johnson Electric 2014 and Hilger’s case: see below.

66.  In Hilger Analytical Ltd v Rank Precision Industries Ltd [1984] BCLC 301, Hilger issued debt instruments to Rank.  Rank then assigned the debt instruments to Overseas & Rank, a company which was closely connected to and shared common directors with Rank.  Later, Hilger brought a misrepresentation claim against Rank.  Overseas & Rank was taken at the hearing to be a genuine purchaser of the debt instrument but with notice of Hilger’s misrepresentation.  One of the issues to be decided was whether “on the true construction of the debenture can it be transferred free of all equities, so that the equitable doctrine that a bona fide purchaser for value without notice … is the only person able to take free of all equites is excluded”: p 304d.  It was held by Harman J that equities were excluded by contract.  At p 305e, the Learned Judge said:

“ Thus,…onthetrue construction of this debenture,…the company had agreed with the original debenture holder that it should have the right to transfer its debenture free of equities. In my judgment his argument is correct. I accept the basic proposition of law that transferees of debentures are subject to equities, but that, by agreement, that position can be altered. On the true construction of this debenture the parties agreed to allow the debenture holder to transfer free of equities. The transfers in this case are both so expressed. In my judgment any creditor would wish to agree with his debtor that the instruments securing the debt shall be as freely negotiable as possible. So far as the law permits this debenture is drawn so as to approximate to a negotiable instrument. The natural ambition of a creditor is thus satisfied by the terms of this debenture.”

67.  In opposition, Ms Lok submits that it is unsafe to rely too heavily on Johnson Electric 2014 which was construing a different contract from the present. 

68.  Of course each case depends on its own facts. But this does not prevent the court from construing the contract in this case at this stage.  This is all the more so when counsel on both sides have ably drawn my attention to all the relevant terms and clauses and made full submissions thereon, which enables the court to consider the issue in full. 

69.  Ms Lok further submits that the contract between Sunway and Xiao (contained in the Share Sale Agreement, the Instrument, the Terms and Conditions of the convertible notes (between Sunway and Xiao which are actually in identical terms as those between Sunway and the plaintiff), and the notes certificates (again not suggested to be different from those between Sunway and the plaintiff) does not contain a term which provides that Sunway waives its rights against Xiao’s assignees with regard to any defence Sunway has against Xiao.  

70.  I do not think this point helps Sunway, nor do I find the submission that Xiao and Sunway expressly reserved their claims in the contract against each other arising from fraudulent misrepresentations and agreed to bind their respective assignees helps either.  The short answer is that the plaintiff is not a party to the contract between Sunway and Xiao. What is or is not provided in the contract between Sunway and Xiao does not concern the plaintiff.

71.  I agree with Mr Chain and the remarks of Harman J in Hilger that the transfer of the chose in action, namely, the Convertible Notes, between Sunway and third parties is a commercial transaction governed by the Terms and Conditions and the Instrument created by the company itself.  Of its own choice, Sunway created a contractual structure which enables third party investors such as the plaintiff to confidently invest in convertible notes issued by the listed company.  It impresses confidence upon investors because, amongst others, there are express contractual terms which stipulate that the convertible notes are transferrable and not subject to any prior equities.  The recognition of this right of the outside investors is reinforced by the listed company’s own bye-laws.

72.  Thus, even though the plaintiff may not be a bona fide purchaser for value without notice, she takes free of any equities including Sunway’s right to rescind the Convertible Notes by virtue of the express contractual exclusion of all equities.  Sunway failed to raise any believable defence.  The plaintiff is entitled to judgment.

E4.   A side issue

73.  Before moving on to deal with quantum, it is worth mentioning that towards almost the end of the parties’ oral submissions, as a result of questions raised by the court, Ms Lok mentioned in passing that the Transfer Agreement is not a genuine agreement.  Unhesitatingly, Mr Chain objected, submitting that it was never raised in the written submission nor affirmations.  There was nothing which drew even close to alleging a sham transaction.  Certainly, the allegation that the plaintiff was a party to the fraudulent transactions of Xiao and Wang was not pleaded in the Amended Statement of Claim under HCA 1391/2015. Ms Lok fairly accepted that this was not pleaded.  Indeed, as is clear in the written submission of Sunway, the main defence raised and developed by Sunway on liability is that the plaintiff is not a bona fide purchaser for value without notice.  She was fixed with knowledge of the background transaction under the Share Sale Agreement. 

74.  It is noted that at para 25 of Leung Chi Fai’s 1^st Affirmation, when referring to another action involving debt chasing by Wang against Leung Chi Fai himself, Leung did mention that “the Agreement is either not bona fide or the Plaintiff had notice of the underlying dispute in HCA 1391/‌2015.”  The Agreement he referred to was the Transfer Agreement.

75.  Having said this, however, Sunway had only focused and developed its defence based on notice or knowledge of the plaintiff. The allegation of the Transfer Agreement being “not bona fide” was not raised again nor developed.  This was made clear in Ms Lok’s written submission at para 45(7), under the heading “P is not a bona fide assignee for value without notice”, where it was said that:

“ … In gist, Wang authorized an agent to collect an alleged debt of HK$330 million from Sunway…The amount demanded by Wang included the sum allegedly due to P under these proceedings. It shows that Wang and P were connected.”

It was clearly a reference to P, ie, the plaintiff and Wang having some connection, and hence the plaintiff would have notice / knowledge of the underlying dispute but not a reference to the Transfer Agreement at all, let alone that it was not genuine.

76.  Similarly, Sunway alleged that the plaintiff was a mere nominee of Wang: para 45 of Sunway’s written submission.  The allegation was made in the context that the plaintiff was implicated in the fraud of Wang and Xiao, and hence relating to the plaintiff not being a bona fide purchaser as she was fixed with knowledge / notice of the fraud.

77.  The same applies to the allegation that the plaintiff made a false declaration to Sunway that she was the beneficial owner of the entire HK$20 million under the two Convertible Notes: para 45(4) of Sunway’s written submission.  The complaint was made in the context of plaintiff attempting to conceal her relationship with Wang and Xiao from Sunway, and hence, similarly, was an allegation made in relation to the plaintiff not being a bona fide purchaser for value without notice.

78.  None of these allegations were ever raised or developed to impeach the genuineness of the Transfer Agreement, or that it was a sham transaction, which was a very serious allegation raised for the first time towards the end of Sunway’s oral submission.

79.  Moreover and importantly:

“ The defendant’s affidavit must ‘condescend upon particulars,’ and should, as far as possible, deal specifically with the plaintiff’s claim and affidavit, and state clearly and concisely what the defence is, and what facts are relied on to support it. This obligation is to ensure that where a plaintiff raises a plausible and prima facie sustainable case, a defendant can convince the court there exists a triable issue so that leave to defend is given or the application for summary judgment is dismissed …”: Hong Kong Civil Procedure 2017, Vol 1, 14/4/4.

80.  Undoubtedly, if Sunway intended to raise the very serious accusation concerning the genuineness or what was referred to as in Leung’s affirmation, ie whether the Transfer Agreement is bona fide, it is encumbent upon Sunway to articulate such serious allegation in clear form and develop it in argument. 

81.  Absent sufficient particulars and submissions, the court is not in a position to consider this kind of allegation as raising a believable defence.

F. Quantum

82.  There can be no doubt that if the plaintiff is entitled to judgment, she is entitled to convert the Convertible Notes to 66,666,666 shares at the conversion price of HK$0.3 per share in accordance with clause 1 of the Instrument. 

83.  She said she would sell the shares for a profit and the market price of the shares of Sunway should be taken at June 2015, ie, after Sunway’s clear indication to her that they were not going to respect her conversion rights.

84.  Ms Lok, however, submits that the plaintiff has failed to comply with Condition 2.3 of the Terms and Conditions which stipulates that the note may only be transferred by execution of a transfer form in prescribed form and the relevant certificates for the notes must be surrendered to Sunway and accompanied by a duly executed transfer form.  She said the conversion notice was only sent to Sunway on 10 November 2015 and even accepting the plaintiff were to sell the shares upon conversion, she would not have been allotted the shares by Sunway for sale till 2 December 2015[2].

85.  Indeed, Ms Lok says Sunway goes so far as to query whether the plaintiff would immediately sell the shares for profits upon conversion.  The plaintiff, as an investor, may well have kept the shares for longer term investment.

86.  Thus, it is Sunway’s case that damages should be assessed as at June 2015 is wrong.

87.  Having considered the arguments, the most appropriate course is for damages to be assessed. 

G. Disposal

88.  Accordingly, I enter judgment on liability for the plaintiff against Sunway in an amount to be assessed.

89.  Costs of the application for summary judgment (as amended) be to the plaintiff, to be taxed if not agreed, with certificate for counsel.

90.  Counsel’s able assistance is much appreciated.